Buy, Sell, or Hold Peloton Stock at $31 a Share?

The Motley Fool
The Motley Fool

Peloton Interactive (NASDAQ: PTON) was the ultimate "stay-at-home" stock in 2020, as more people rushed to buy at-home fitness equipment to stay active. But the return to normal routines has caused some confusion about Peloton's growth trajectory. The stock has acted like it's in a pinball machine, bouncing all over the place. After soaring to a high of $171 in early 2021, the share price has sunk all the way to around $31 at the moment.

Should investors buy, sell, or hold? With the share price approaching the $30 level, the valuation is starting to look very tempting. After all, low valuations can set the stage for market-beating returns, as they did when Peloton was trading around this same level two years ago.

Here's why it's time to take a second look at Peloton.

Image source: Peloton Interactive.

The opportunity is still there

Peloton's stock price and revenue growth went parabolic in calendar 2020, but that is long gone. The company may never see those 200%-plus top-line growth rates again, but this leading fitness platform still has a tremendous opportunity ahead.

Management previously estimated the serviceable addressable market for connected fitness products at 15 million households. Through Peloton's fiscal 2022 first quarter ended in September, it had 2.49 million connected fitness subscribers. That's only 12.5% of its addressable market.

Peloton's estimate seems reasonable, considering there are an estimated 200 million gym-goers worldwide. Not only is the revenue upside there, but investor expectations are much lower than this time a year ago, which is setting up an undervalued stock price.

The current price-to-sales ratio of 2.5 times looks cheap for a business that generates 22% of its total revenue from subscriptions. For example, other top consumer brands, like Apple , that also have growing subscriptions businesses trade at significantly higher multiples of sales.

PTON PS Ratio data by YCharts.

The comparison with Apple is not to show that Peloton should trade at the same P/S ratio as the iPhone maker, but to point out that Peloton is trading at an extremely low level right now. There is potentially room for that P/S gap to narrow a bit.

In fiscal 2021 ended in June, Peloton generated 78% of its revenue from connected fitness products (e.g., bikes and treadmills). Products generated a 29% gross margin, compared with 62% for subscriptions. The higher margin from subscriptions is the main reason the stock deserves a higher P/S multiple.

Subscription revenue is growing faster than that of hardware, increasing by 381% over the past two years, compared with 329% for connected fitness products. Peloton has reported operating losses over the past three fiscal years, but the growth in higher-margin subscription revenue points toward healthy profit margins over the long term.

Management's current guidance for connected fitness subscribers shows an estimate of between 3.35 million and 3.45 million for fiscal 2022, up from 2.3 million at the end of fiscal 2021. As long as subscribers are growing, Peloton will be fine.

Peloton isn't going anywhere

I previously viewed Peloton negatively after it reported disappointing earnings in November, but I'm changing my mind now that the stock continues to get trashed by the market. Peloton is not a throwaway brand.

Sure, Peloton lowered its full-year revenue guidance and is facing competition, most notably from NordicTrack owner iFIT Health & Fitness, which filed a Form S-1 last year with the Securities and Exchange Commission in preparation for an initial public offering.

I use a NordicTrack bike, but I'm still interested in buying shares of Peloton because of its brand strength. Growth comparisons with the pandemic are creating near-term uncertainty over Peloton's normal growth trajectory, which is why the stock is falling.

Meanwhile, the convenience of working out at home is not going away. That's why Apple, Nike , Lululemon Athletica , iFIT, Nautilus , Peloton, and other brands are all-in on this opportunity, and running a lot of TV ads. There are millions of future subscribers to still gain.

Right now, the stock is a hold at minimum, and if investors are willing to endure near-term volatility, it might be time to think about buying this leading fitness brand .

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John Ballard has no position in any of the stocks mentioned. The Motley Fool owns and recommends Apple, Lululemon Athletica, Nike, and Peloton Interactive. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy .

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